‘Every investment out there looks really lousy’

The manager who has only lost money once tells Danielle Levy what to buy when inflation is high and why stocks won’t save investors

As 2022 gets under way, there is much for investors to feel nervous about: high inflation, bubble-like conditions and poor prospects for conventional bonds to make any money.

This is why Capital Gearing Trust is planning for the worst, with less than 20pc invested in shares and plenty of “dry powder” (short-dated bonds and cash) to put to work in the event of a market sell-off.

Peter Spiller has managed the £1bn trust, which invests in a range of assets, since 1982. His personal stake is worth £ 15m and he’s delivered returns for investors through some of the toughest of times, only recording a loss in one financial year, in 2013. Over the past five years, the trust has returned 38pc, ahead of 36pc by the average “flexible investment” trust.

He tells Telegraph Money why residential property landlord Grainger looks attractive when inflation is on the up and why US inflation-linked government bonds have an important role to play in portfolios.

WHO IS THE INVESTMENT TRUST FOR? Investors who are averse to losing money, but want a better return than the UK stock market over time. In principle, investors could invest all their money, as I have done, but plenty use it to protect their savings as it has low volatility.

HOW DO YOU INVEST? We look at every investment in terms of risk – how quickly its value rises and falls. If the risk is low and the potential for returns high, we lock those in for as long as possible.

Today, prospective returns look lousy for practically everything: risk is high, balance sheets are horrible and debt is excessive throughout the world. We are being very defensive. Over the past 40 years, our choice of investments has worked well, not just by finding cheap investment but also by owning things that do not rise and fall in tandem. For example, US government bonds, where the income rises with inflation – known as Tips – have inversely correlated to share prices for the past 20 years. This will continue.

WHAT IS CHEAP RIGHT NOW? We think inflation will be significantly higher over the coming decade than we have experienced over the past 20 years. A good investment for us is one that can deal with that. One area that looks pretty attractive is residential property for letting. I think a company such as Grainger will produce decent returns. Its shares trade at a small discount to its value.

WHAT WILL STOCK MARKETS DO? A lot of the factors around the world that were pushing markets upwards aren’t there any more. Inflation had been depressed by globalisation making goods cheaper. This is changing. And we also had low interest rates and money printing, which is in the first stages of tightening.

We have seen a lot extremely high valuations, particularly for new companies, Bitcoin, meme stocks and so forth. All of these were signs of fairly bubblelike conditions. Famously bubbles are impossible to call but the froth does appear to be coming off at the moment. Investors should be very aware of the game they are playing.

We have less than 20pc in shares right now and quite a lot of what we call “dry powder” – short- dated, high quality bonds that are easy to sell, and cash. The lesson from the beginning of the pandemic, which I think could be repeated, is that when you get market sell- offs they tend to be indiscriminate and there are always good bargains to be had.

WHAT HAS BEEN YOUR BEST INVESTMENT? One bedrock stock that has done amazingly well is the North Atlantic Smaller Companies investment trust, which we have owned since the 1980s. Its manager, Christopher Mills, has achieved the most extraordinary record. This century, its share price has gone from 479p to £43, so it is up roughly nine times in capital value. If you compare that to the UK market, it is pretty remarkable. The shares also look cheap on a 28pc discount.

AND YOUR WORST? The biggest mistake I have made is not investing enough in US stocks. It has gone from being expensive to being very expensive. If valuations are high, prospective returns are low and risk is high, so I have never wanted too much of something such as that. We often move out of markets very early, but this is how we have built our record of maintaining value. If we stayed in the hottest investment all the time, we’d just produce the same returns and the same volatility.

Fortunately, we have more than made up for it with our investments elsewhere.